"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput

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Thursday, February 17, 2011

One of the idiosyncracies of the rather obscure at times Treasury International Capital flows data is that when reporting on the number of Treasuries purportedly being held by foreign nations, the data is taken from the country in which the transaction is actually conducted and not necessarily the country of origin behind the purchase.

In looking over the recent data, it appears a fairly large amount of Treasury business is being handled through London as evidenced by the sharp increase in reported Treasuries holdings in the UK.

It has been my experience with this report, that when the adjustments are made once a year and the Treasuries are actually recorded as to what nation the purchase or sale originated from, that a rather significant amount of the UK Treasuries are moved to the Chinese category. At least that has been the pattern for as far back on the chart as I have chosen to go, namely 2004 - 2009. However, last year, 2010, during the annual readjustment month of June, there was little change in the reported Chinese holdings or those of the UK for that matter.

We will have to wait for some time to verify this as the data is already 2 months behind and the annual readjustment is done during the month of June. Suffice it say that there has been an almost $200 billion increase registered in the UK holdings since June of 2010 to December 2010. That averages out to a bit more than $33 billion per month giving the UK the highest rate of increase in buying on an annualized basis than any other nation. Exactly how much of this is due to Chinese buying is uncertain.

No doubt there are more than a few observers who are greatly interested in seeing where this coming June's adjustment is going to place things. If we get a repeat of last year and little in the way of adjustments occur, that will not be particularly encouraging in regards to Chinese appetite for US Treasury debt especially considering that their overall rate of Treasury buying is declining. (see the chart below showing the drop off in the RATE at which they are buying). I should note here that I actually attach more sigificance to the rate of Treasury accumulation than to the overall holdings mainly because of the speed at which the US is cranking out these paper promises to pay.

The Fed is talking about unwinding the QE purchases when the program ends. With the sheer number of Treasuries that they have on their balance sheet, one has to wonder just whom they plan on selling all of those to should we see no noteworthy adjustments made this coming June to the Chinese account.

The big news today is silver. It is screaming higher dragging nearly every single metal upward with it. You name it, whether it was gold, copper, platinum or palladium, silver pulled them all higher as it hit a fresh 30 year high shattering overhead chart resistance as if it was nonexistent. Once $31 was breached on the upside, terrified bears began fleeing in droves. That took the price up past $31.27, the recent peak which forced out more shorts and brought in a rush of fresh buying that ran the market all the way to $31.50 or so before it set back a bit.

The key to its rise was its refusal to break back down below $30.50, a level around which it has been oscillating for the past session and which had also served as overhead resistance in recent activity. It briefly dipped below that level but buyers came in very quickly recapturing it. Bulls then went to work and shoved it back towards $31 where the sellers had been attempting to hold the line in hopes of preventing a return to its recent peak. They failed.

Price not only took out $31 but went right through the peak at $31.27 paused for a moment, and then shot immediately towards $31.50 before it took that out as well. Impressive is too mild of a word to describe what happened today. Based on what I can see of the price chart, it now is on a footing to make a run at $32.25. It could pause here a bit to digest the enormous gains of today but if it does not, it will breach $32 with relative ease.

Open interest continues to increase in silver with the roll out of March commencing and traders shuffling into the May. The continued spec buying, especially from the Managed Money camp is steamrolling the shorts for now.

Gold is experiencing a similar increase in open interest with that number up nearly 6,000 in yesterday’s push towards $1380. This is exactly what the doctor ordered to give it enough impetus to dislodge the bullion banks from that level. It needs to continue if bulls are going to kick through the barrier near $1385 which is evident on the chart. A push through this level will give the longs some ammunition in the form of additional new recruits to take a shot at $1400 once again.

Corn notched another 31 month high in price today erasing the losses of the previous three sessions associated with the USDA manufacturing more paper corn with its data release showing an expected increase in corn acreage for the upcoming crop year. As I said at that time, that may be all well and good, it really did not come as any surprise, but it will not put one extra bushel of corn on the market until harvest time later this year. The market needs corn now; not then as evidenced by the surge in exports reported by the USDA today (over 1 million metric tons). End users stepped up and bought on the dip.

With corn giving the grain sector strength and with silver giving the metal sector strength, it is not unexpected to see the CCI, the Continuous Commodity Index, soaring to yet another brand new lifetime high.

Cotton is defying gravity as it is now an astonishing $2.04/pound having risen 82% in the last 3 months alone!It closed at an expanded limit up today with over another 1000 orders waiting to be filled in the pool.

Apparently the surge higher in the commodity sector and the equity markets, which are also going vertical, was lost on the bond market which continues to trade in a manner suggestive that it is oblivious to all of this inflation. Yes indeed, the Dollar sank lower today, equities surged, commodities surged, and bonds responded by moving interest rates lower to no doubt fully compensate anyone stupid enough to buy them for all that sort of inflationary risk. Oh what a tangled web we weave when once we practice to deceive. The Fed continues to single handedly prop up the bond market through its primary dealers who are given their marching orders and more than happy to comply. It is just too lucrative scalping all the shorts.

It seems as if there is some sort of universal law, akin to gravity or centrifugal force, that whenever the price of gold is moving higher, talk MUST surface about it being confiscated by the US government. I do not know whether this is also related to the tides or activity on the surface of the sun but it seems as if it is designed to create a sense of near panic among those who want to buy the metal against an inevitable devaluation of the US Dollar.

Rather than spending untold hours of precious time answering individual emails, I decided to just post a short response to this here.

First of all, there is no need for the US government to confiscate gold because they do not need it. The reason it was confiscated in the early 30's by the Roosevelt administration was because they needed more gold in order to ramp up the money supply. While the domestic gold standard was killed, the US was still on an international gold standard. Balance of trade payments was still handled in gold and it would either flow in or flow out of nations depending on how that trade balance rose or fell with its trading partners.

Today, there is no gold standard which is also the reason that there exists such massive trade imbalances among nations.

Secondly - the US monetary authorities do not need gold to ramp up the money supply. Think two little letters: "Q" and "E" and put them together: "QE".

QE1 was $1.25 TRILLION and QE2 is $600 billion or $900 billion if you count agency debt. Has the Fed needed a single ounce of gold to add $2 trillion in new "money" to the system?

Thirdly - there is no shortage of gold among the US holdings in the sense that we have a significant amount. Reported holdings of the US are over 8,000 tons. Of course we do not really know how much gold we actually do have because we cannot audit the stuff and have to trust our masters not to lie. But that is besides the point. The real point is the US government officially values the sum of our gold holdings at the ridiculous price of $42.22 when the market price is closer to $1,400.

Fourthly - If the US would merely change the way it accounts for its gold reserves to reflect the current market value of the metal, that alone would solve a number of problems. More particularly, if the authorities would let the price of gold rise to its own natural equilibrium point, which would be multiples of its current price, it would take care of a host of difficulties.

Fifthly - at some point in the future I believe that this is exactly what is going to happen. Gold will be brought back into the monetary system in some form and will trade at a permanently higher level, which level it will then fluctuate around but will no longer trend. In other words, we will not see a repeat of the late 1979 - 1980 period which after it had rallied to then all time highs, embarked on a 20 year bear market. The current monetary system is showing severe signs of stress and all this talk coming from the emerging economic powerhouses about changes to the system and the Dollar as the sole reserve currency is not idle but reflects where we are headed. This obviously is not something that is going to happen overnight but I believe the die is cast and it is inevitable, especially now that the Fed has embarked on its path of madness euphemistically known as Quantitative Easing.

There is nothing written anywhere in stone that states the US Dollar must remain the sole global reserve currency. One can easily point to the history of Pound Sterling. During its heyday and at the height of British economic power, any such talk suggesting it would be dethroned must have seemed absurd at the time. Yet, history shows us that is exactly what did happen, for much the same reasons that are now plaguing the United States. Bretton Woods was supposed to have solved all that but it too has failed, thanks to the weakness of men.

The following story from Dow Jones details several factors which reveal the totally contradictory claims being made by so many analysts that dominate the financial reporting here in the US.

On the one hand, we are continually reminded over and over again how the overall economy is improving. We are told that business profits are rising in an environment which is seeing strong global growth and that this strength is going to be reflected in the US where predictions are for a growth in the range of at least 3.5 % this year.

On the other hand, we are told that inflation is not a problem. Businesses for the most part are choosing not to pass along the rise in input costs reflected in the PPI from yesterday because of the lackluster job market and the resultant reluctance of the consumer to spend. In short, businesses do not want to risk losing market share in this sort of environment and thus upward pressure on prices at the retail level is minimal.

The big problem with this line of reasoning is that it is utterly illogical. Perhaps this is what happens when the school system no longer teaches students how to actually think.

If business is reluctant to pass on price increases then how can profits grow particularly if the consumer is supposedly reluctant to spend. If I spend x dollars to produce a product and sell it for x + 2 dollars, what happens if the cost to produce the product goes up to x + 1 and I still am forced to sell it for x + 2? Obviously profits shrink. If profits shrink how can I expand hiring and put more people to work? Answer - I cannot.

So which is it? Is the economy gathering steam or is inflation not a problem? It cannot be both.

I believe that the Fed's liquidity injections are indeed feeding into the economy and that inflation is indeed a problem and that no business can long survive in an environment in which its input costs are rising and yet it does not pass along the rise to its end users or to the consumer. Business exists to make profits - no profits - no growth; no growth - no hiring.

Just today the CCI (Continuous Commodity Index) pushed yet to another all time high in price before retreating somewhat. As far as I am concerned, this index is the best economic indicator that I need to tell me whether or not input costs are rising.

As mentioned in my post yesterday, once the velocity of money begins to increase in the US economy, we will see more and more that statistic juggling notwithstanding, inflation pressures will be on the rise here, just as they are all over the globe. Prices will indeed be forced upward at the retail level just as they already are rising, expect for the fact that the government conjurers continue attempting to sweep such increases away with their contemptible manipulation of the useless CPI.

OH by the way, gasoline prices hit a 29 month high today at the Nymex! But don't worry - core inflation is completely tame!

DJ UPDATE: US Jan Core Inflation, Weekly Jobless Claims Both Rise

Thu Feb 17 10:41:20 2011 EST

(Adds analyst comment, background.)
By Luca Di Leo and Jeffrey Sparshott
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--U.S. consumer prices continued to rise in January as
energy and food prices increased, but underlying inflation remained tame as
many companies struggled to pass on higher raw materials costs to consumers.
The seasonally adjusted consumer price index last month increased by 0.4%
from December, the Labor Department said Thursday. Over the last 12 months,
prices were up 1.6% before seasonal adjustments.
But underlying inflation, which excludes volatile energy and food prices and
is considered a better measure of price trends by the Federal Reserve, rose by
0.2%. The annual underlying inflation rate stood at 1.0% last month, below the
Fed's informal target of just under 2.0%.
Economists surveyed by Dow Jones Newswires ahead of the release expected
consumer prices to rise by 0.3% and the core consumer price index to gain 0.1%.
In December, consumer price inflation showed a 0.4% monthly rise, revised from
a previously reported 0.5% gain.
Earlier this week, producer price data, which measure how much manufacturers
and wholesalers pay for goods and materials, showed underlying wholesale prices
rising the most in more than two years. That sparked concern that inflation
could start to rise more sharply.
But Thursday's figures indicate that most companies aren't passing along
price increases to consumers. One exception: clothing stores. Apparel prices
were up 1% in January.
"Looking ahead, with cotton prices at an all-time high in nominal terms,
apparel manufacturers have stated their intention to raise prices for spring
apparel, so this component may be on an upward trajectory in the coming months
and add to the core," Royal Bank of Scotland analysts said.
But overall, firms are struggling to pass higher commodity prices on to
consumers due to persistently high unemployment, which is keeping Americans
cautious about spending.
Underscoring the soft jobs market, the Labor Department Thursday said the
number of U.S. workers filing new claims for unemployment benefits increased by
25,000 to 410,000 in the week ended Feb. 12.
Economists surveyed by Dow Jones Newswires had expected claims would rise
last week by 17,000 to 400,000.
"With the unemployment rate still at 9.0%, there will be plenty of downward
pressure on underlying prices and so we don't expect core inflation to trend
upwards," said Paul Ashworth, chief U.S. economist at Capital Economics.
New claims figures have been volatile in recent weeks due to severe winter
weather. Now, the jobs market appears to have stabilized near January's levels.
The four-week moving average of new claims, considered a more reliable
indicator because it smoothes out volatile data, increased 1,750 to 417,750 in
the week ending Feb. 12. Jobless claims have been on a gradually downward trend
since September 2010.
"The longer-run trend in the claims data remains consistent with a healing
labor market," said JPMorgan Chase economist Daniel Silver.
At their last meeting three weeks ago, Fed officials said they still expect
slow price increases over the next two years and unemployment to remain close
to 9.0% until the end of 2011.
Thursday's Labor Department reports showed that higher prices for energy
commodities and food accounted for more than two-thirds of the rise in consumer
prices. Food prices rose 0.5% in January, the biggest increase since September
2008, with all six major grocery store food groups showing gains.
Energy prices continued their recent string of increases, rising by 2.1% last
month as the gasoline index went up for the seventh month in a row.
In the meantime, real average weekly earnings fell 0.3% over the month in
January as both the average workweek and hourly earnings dropped, the Labor
Department said.
The Labor Department's report on consumer prices can be found at:
http://www.bls.gov/news.release/pdf/cpi.pdf.
-By Luca Di Leo and Jeffrey Sparshott, Dow Jones Newswires; 202-862-6682;
luca.dileo@dowjones.com
(END) Dow Jones Newswires
02-17-11 1041ET
Copyright (c) 2011 Dow Jones & Company, Inc.

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About Me

Dan Norcini is a professional off-the-floor commodities trader bringing more than 20 years experience in the markets to provide a trader’s insight and commentary on the day’s price action. His editorial contributions and supporting technical analysis charts cover a broad range of tradable entities including the precious metals and foreign exchange markets as well as the broader commodity world. He is a frequent contributor to both Reuters and Dow Jones as a market analyst for the livestock sector and can be on occasion be found as a source in the Wall Street Journal’s commodities section as well as CBS Marketwatch where his views on the gold market can often be found.
He is also an avid beekeeper.

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